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Yesterday the Senate banking committee held hearings on the credit card industry's aggressive lending practices. The testimony of Harvard law prof Elizabeth Warren on the "tricks and traps" credit card companies use to goose up rates and pile on fees was particularly eye-opening. (Go here if you'd like to read the card issuers' side of the story.) Credit card debt is often framed as a matter of personal responsibility. Which it is. But it's not just that--credit card companies have learned how to make their rules so wildly complex that some cards are just plain unsafe for even the most responsible users, argues Warren. In calling for tighter regulations, she draws an analogy to other kinds of consumer products:

No one needs to be an engineer to buy a toaster. No one needs to be a crash test scientist to buy a car. And no one should need to be a lawyer to take on a credit card.

I know, I know: Lenders need to be compensated for extending to credit to people who might not always pay on time. But there's a straightforward way to do that. Just charge a risk-appropriate rate up-front, and use penalties to keep borrowers in line. But many issuers now seem to be using late fees and punitive rate hikes as an essential part of their growth strategy. How do I know this? Here's a line from Capital One's 2005 annual report to shareholders.

Additionally, the increase in other consumer loan products, such as home equity loans, puts pressure on growth throughout the credit card industry. These competitive pressures remain significant as a result of, among other things, increasing consolidation within the industry. The industry’s response to this competitive pressure has been to increase mail volumes to record levels, and in some parts of the market, most notably, with respect to the prime revolver customers, offer extremely low up front pricing that appears to make profitability heavily dependent on penalty repricing well beyond "go to" rates for a substantial percentage of customers. The Company is choosing to limit its marketing in those selected parts of the market because it believes the prevailing pricing practices will compromise both economic returns and customer loyalty over the long term.

To be clear, Capital One is describing some of its competition in the bolded text, not its own practices. But you have to figure that the folks at Capital One know their industry. And what they are describing is a rigged game.

The practice of credit card companies being able to change terms any time for any reason absolutely needs to be outlawed. When one signs a contract at a bank or other lending institution, those terms are locked in for the term of the loan, as it should be.

Posted By Shirley Morganti, St George, Ut : 7:19 PM

While I completely agree that there needs to be a simplification of credit card terms, fees, penalties, etc., this does nothing to address the consumer/credit mentality that is all too pervasive in American society.

People were abusing their credit cards and subsidizing lavish lifestyles beyond their means *long* before these deceptive practices came along.

Ultimately, it's a matter of personal responsibility - some of us are more responsible than others. I'm usually very sympathetic to the plight of "average" people, but I just can't muster the sympathy on this one...

Posted By Chris Morrison, Sugar Land, TX : 12:39 PM

It is extremely important that as a society, we can positively stress the need for American citizens to understand that the progressive concepts of applying for credit in this developing age of newly aggresive lending pratcies really have changed, in many ways, for the better.

For instance, the fact that much-needed legislation has been recently passed which makes it impossible to declare bankruptcy in the same manner as in the past, and which is not only a testament to the fact that yes, many consumers still are predictable "deadbeats" in the eyes of lenders, it also must be understood (by consumers and lenders alike), that such legislation came to pass because the problem of consumer behavior was clearly identified, and was therefore then appropriately addressed by being dealt with in a proper and timely manner by an effective Congress, for which we as a whole nation should be truly grateful.

This refutes such opinions which hold that "the consumer/credit mentality that is all too pervasive in American society" remains "alive and well" so to speak...no, it does not, or the legislation would not have been passed yet!!! Such clouded judgement is just as much a part of the problem which allows these aggresive lending practices to continue, as are those who remain ignorant of the new laws, continuing to defraud lenders and spurring this so-called "lashback."

Posted By Mike, New York, NY : 6:49 PM

As interest rates have fallen, credit card companies have only increased their rates. It is absolutely criminal that a credit card company can get away with charging 25% or more in interest rates when the prime rate is under 5%. And it is clear none of these companies will lower their rates without legislation forcing them to. So that's what we need. I hope lawmakers see this for what it is - extortion.

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